ATHENS, Greece ? Europe's days-old plan to solve its crippling debt crisis has been thrown into turmoil by the Greek Prime Minister's shock decision to call a referendum on the country's latest rescue package.
Stock markets plunged around the world Tuesday, particularly in Europe, with the Athens exchange sliding 5.5 percent, on worries the Greek government could lose the referendum vote. If that were to happen, Europe could face a devastating disorderly debt default and Greece could leave the common currency.
Months of uncertainty over the vote will threaten the stability of larger economies like Italy, which saw its borrowing rates rise sharply. It will also hinder European leaders' efforts to get countries like China to contribute to their expanded bailout fund and to convince banks to accept bigger losses on their holdings of Greek debt.
"While it may be the democratic thing to do ... what happen if Greece votes 'no', which is possible given how unpopular the bailout plan appears to be amongst Greece's voters?" said Michael Hewson, analyst at CMC Markets. "The resulting fallout could well result in a complete meltdown of the European banking system and throw Europe into turmoil."
George Papandreou stunned investors, as well as his own citizens and partners in the eurozone, by announcing late Monday that a plebiscite will be held in what he called "a supreme act of democracy and of patriotism for the people to make their own decision." A confidence vote in the Socialist government will also take place at the end of this week.
Given that Greece is heading for its fourth year of recession next year, investors believe there is a real chance Papandreou may lose the vote. A victory in the referendum, on the other, could give the Greek government a solid mandate to pursue its austerity measures required in exchange for the bailout loans.
A recent opinion poll suggested that 60 percent of Greeks were against the austerity measures that have been required by international creditors from the eurozone and the International Monetary Fund in return for crucial bailout loans. However, other polls show broad support for remaining in the eurozone.
Opposition parties rounded on Papandreou, accusing him of blackmail and vowing to block the vote at all costs, and foreign European officials expressed dismay.
A senior politician in Germany's ruling center-right coalition said he was "bemused" by the announcement and made clear that a "no" vote would likely lead to a Greek bankruptcy.
"Then the other countries have to protect themselves, and Greece has to see by what means it gets out of its misery ? whether they can stay in the euro, whether they leave, what they do," said Rainer Bruederle, parliamentary leader of the Free Democratic Party, a junior coalition party, on Deutschlandfunk radio.
Swedish Foreign Minister Carl Bildt tweeted: "I truly fail to understand what Greece intends to have a referendum about. Are there any real options?"
The referendum would be the country's first since 1974, when Greeks voted to get rid of the monarchy, and is expected to be held early next year should the government get through the confidence vote.
The prospect of months of uncertainty has deflated any remnants of optimism over last week's grand European plan to contain the debt crisis.
After weeks of complex negotiations, eurozone leaders agreed last Thursday that private holders of Greek bonds should take a 50 percent loss on their holdings, reducing Greece's debt burden to 120 percent of national income by 2020 from around 180 percent at present. They also agreed to boost the firepower of the bailout fund to euro1 trillion ($1.37 trillion) and to increase banks capital buffers.
Fears that the plan could come undone drove a broad retreat in global markets. Germany's DAX slid 4.3 percent while France's CAC-40 dropped 3.7 percent. The euro fell to a daily low of 1.37 while borrowing rates jumped higher for Italy and Spain, considered the next weakest links in the crisis and too expensive to bail out. News that Greece's Finance Minister Evangelos Venizelos went to a clinic after suffering stomach pains added to the renewed bout of fears in the markets.
French President Nicolas Sarkozy was holding a meeting with his top government officials on Tuesday afternoon to discuss the situation. Sarkozy is hosting leaders of the Group of 20 leading economies in Cannes on the French Riviera this week for a summit expected to focus on Europe's debt mess. His ability to convince foreign leaders of Europe's abilities to steady its turmoil ? and attract foreign investment ? will suffer.
In Athens, the domestic politics heated up. A governing party lawmaker defected over the decision to hold a referendum, leaving the Socialists with only a two-seat majority in Parliament, and the main opposition conservatives called for Papandreou's resignation.
"In his attempt to save himself, Mr Papandreou set a divisive, blackmailing dilemma that endangers our future and our position in Europe," New Democracy party leader Antonis Samaras said. "I explained to the president that New Democracy is determined at all costs ? at all costs ? to prevent such rash experiments, and it can do that."
He did not elaborate on what he planned to do.
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Pylas contributed from London. Geir Moulson in Berlin and Sylvie Corbet in Paris also contributed to this report.
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